Lululemon: Investor relations rollercoaster

Over the past year, Canadian yogawear brand and erstwhile stock market darling Lululemon Athletica has often been cited as proof of the market opportunity in new-age fashion concepts which pick up on psychographic and attitudinal shifts -- i.e. that people are looking for more from their clothing than just functional and aesthetic utility. Some people, it is argued, want healthy, ethically conscious, and environmentally friendly feel-good benefits as well. Lululemon was delivering this in spades, while also benefiting from a lifestyle craze centred around Yoga, building a business of close to $150m in revenues.

However, the news all over the North American press this week was dramatically different. The New York Times published a damning article suggesting that Lululemon's claims about the seaweed content in one of its clothing lines were patently false. Through its seaweed content, the VitaSea line claims to reduce stress and provide anti-inflammatory, antibacterial, hydrating and detoxifying benefits to its wearers, but the New York Times' test showed no evidence of seaweed in Lululemon's clothing.

This sent Lululemon's stock price on a rollercoaster ride. Previously, Lululemon had been enjoying stellar stock performance, reaching $60 a share after an IPO price of $25 in July. Yesterday the stock closed at $41.50.

Meanwhile, market analysts continued to debate the potential long-term impact of the conflicting reports. Blackmont's Deborah Grey said that the false claims could be catastrophic:

If Lululemon’s claim proves to be false, we believe this controversy could challenge its strong brand image, authenticity and loyal cult following, which could expose it to pricing risk, forcing it to incur marketing costs to restore its brand, and could put its aggressive retail expansion efforts at risk

On the other hand, analysts at RBC Capital Markets believe that the primary reason for the cult brand's success is the fit of its clothes, not its fabric content (the VitaSea line makes up only 3% of sales):

We believe the attraction for customers shopping at Lululemon is the fit and comfort, and most importantly, how they look in their clothes. The garments’ form-flattering silhouettes will continue to drive customers, more so than any one particular fabric enhancement.

For a brand that has had a halo around it since its humble beginnings in Vancouver, this is a reality check of sorts. Moving into the public markets means being answerable to consumers and investors alike. Proving hard-to-quantify new-age benefits requires impeccable investor relations and corporate communications, especially because these concepts are new to analysts and it's still not clear what is the driving forces for the brand's success. Are the feel good benefits crucial to its success or are they just proverbial nice-to-have cherries on top.

Even if further tests prove that the company's claims about VitaSea are accurate, Lululemon can no longer pretend to be the innocent little company it used to be. All of the claims it makes about any of its products must be thoroughly tested and it must also have contingency plans and a PR and communications machine in place to deal with crises as they arise. The standards and explanations for its claims must be clearly set out so the company, consumers and investors are using the same measuring stick. Lululemon has been caught a little bit behind the 8-ball on this.

Another reality of the public markets is profiteering. A final twist to all of this is that it was a private investor that paid for the first test which questioned the claims of the VitaSea product and it was he who spurred the New York Times to do their own test and publish the results. This investor was hoping that the test results would send Lululemon's stock into a free-fall, enabling him to short-sell the stock and make a nice bundle of cash. Mission accomplished.